Dairy sector set for another profitable year

The Australian dairy sector is set for its fourth consecutive profitable year, according to Rabobank’s most recent annual Australian Dairy Seasonal Outlook.

With stronger domestic dairy market returns, a weak Australian dollar and “aggressive recruitment and retentions strategies” by dairy producers, the milk price will likely be lower than what is currently being offered across parts of the southern export region, but there is a “firm landing zone” expected for new season Australian milk prices. According to the report author, Rabobank senior dairy analyst Michael Harvey, these are providing a buffering effect to the full extent of global pressures.

As the 1 June deadline for minimum milk price offers from Australian dairy companies approaches, the bank has forecasted minimum offers for new season milk in Southern Australia to be between $8.50 /kgMS and $9.00 /kgMS.

This, at worst, is a 10% decrease from 2022/23, according to Harvey.

The report, titled ‘Looking for a Firm Landing Zone’, says there is relief for dairy farmers from the recent high cost base, with lower prices for purchased feed and fertiliser flowing through balance sheets.

Global feed benchmark prices are down compared with last year, although still above medium-term averages, while local wheat prices are tracking close to global trends.

“Despite the relief on purchased and home-grown feed costs, as Australian dairy farmers begin budgeting for the year ahead, they will still have to deal with a high-cost-of-production environment in the 2023/24 season, as inflationary pressures flow through in overhead costs, particularly the cost — and availability — of labour,” Harvey said. “At the same time, interest rates are moving higher.”

Milk prices in a number of dairy-exporting regions around the world have fallen, following the large decline in global dairy commodity prices seen since the first half of 2022.

“Since that time, prices in the ‘dairy commodity basket’ have fallen significantly on the back of a shift in underlying fundamentals in the market,” Harvey said.

These included a return to growth in milk supply across most dairy-exporting regions (coupled with softer domestic demand), sluggish import appetite from the world’s largest dairy importer, China, and widespread demand ‘rationing’ in many dairy markets across retail, foodservice and ingredient channels.

As a result, indicative stream returns for Australia’s dairy product mix have fallen between 30% and 40% compared with last year and are now at or below average returns of the previous five years.

Downward pressure will remain on global dairy commodity prices due to “near-term global fundamentals” such as increasing growth in milk production in export regions and the absence of Chinese buyers.

“However, at some stage the cycle will turn and global commodity prices will begin to increase, but this will depend on when China returns as a meaningful buyer in export markets,” Harvey said.

Australia’s domestic market returns, however, have reset for the better.

“The domestic market is experiencing a structural increase in consumer prices across the dairy aisle, led by drinking milk and cheese in particular,” Harvey said.

According to Harvey, this has been driven by dairy processors passing through record-high farmgate prices and other input costs. This will support the value chain and lead to stable prices for milk producers in the domestic market.

A declining milk pool continues to challenge Australia’s dairy supply. For the first time since 1990, the annual availability of milk for manufacturing will fall below six billion litres in 2022/23.